FDI Germany

FDI Germany

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Executive Summary

Germany is an established European democracy that has a history of free and fair elections. Germany ranks higher than the United Kingdom with regard to accountability and voice. The labour market in the country is also quite flexible even despite the 2009 financial crisis. Nevertheless, the aging German population places a considerable weight on the healthcare system and the economy. Although the technical workforce in the country may be declining the SMEs in the country are quite innovative. The legal structure in Germany is very comprehensive. However, the country is still plagued by tax evasion. Considering the economic and political might of the country in the Eurozone and the world at large, Germany offers an attractive opportunity for foreign direct investment.

1.0 Introduction

Germany provides foreign investors with exciting international and national business and marketing perspectives. However, the costs are comparatively high. Costs include employment costs as measured using wage rates and social security charges. Therefore, successful foreign direct investment in Germany requires proper planning and sophisticated operation. The German economy represents almost all industries. Like other countries with highly skilled populations, high costs of employment and high-educated workers the best prospects come from providers of commercial, financial and technical services. The industries in Germany are dynamic and firms can expect room for growth. The country provides an equal opportunity to both domestic and foreign companies. It is important to note that the state provides substantial support in form of subsidies in research and development in order to spur the creation of new products. This report aims at presenting the benefits, risks and cost of investing in Germany (Germany Country Profile, 2013).

2.0 Outline

Analysis	Benefits	Risks	Costs
Political system	A strong democracy A robust federal system	Right-wing extremism Strained relationship with France	Formulation of EU banking Union Corruption
Economic system	Highly competitive economy Flexible labour market	Exposure from the Eurozone debt Bank failure in the region	Slow foreign trade Low local consumption
Legal system	Comprehensive legal and regulatory framework Formal openness to FDI.	Overregulated service sector. The country’s licensing and permit process is quite cumbersome	The taxation wedge is high.

3.0 Political system

3.1 Benefits

Germany is a stable democracy that has a constitution that stipulates the roles of the legislature, executive and judiciary. The federal government is the top most source of political authority despite that Germany has municipalities and states. The strong federal system has enabled the country to have a centralized rule for the formulation of fiscal, defence, monetary, internal security and legal policies. According to Onaran, Stockhammer, & Zwickl (2013), elections in Germany are regarded to be fair and free. The World Bank ranks Germany in the 92.5 percentile with regard to accountability and voice. This measures shows the ability of the citizenry to select the government of the day. It is also a measure of the freedoms of association and expression and free media. This indicates that the country has a stable democratic system.

3.2 Risks

According to Linski et al (2011), there is a growth of Right-wing extremism in Germany. The country has been accused of showing discrimination to immigrants. In a country that has more than 10 percent of its population consisting of people from other nationalities, the Neo-Nazi challenge is a considerable risk for FDI. The relations between Germany and France are getting strained as seen in the unfavourable description of Chancellor by the French Socialist Party. Leaked documents from both sides in recent years have resulted in confrontations that reveal ideological differences between the two countries. If the two founding countries of the European Union continue to have strained relationships, the region may continue to suffer economically.

3.3 Costs

European leaders have been proposing the formulation of a banking union in the region. Should this happen, investors in the country are bound to lose money as a result of the susceptibility of the banking industry in the region. Germany has been affected by corruption in the bureaucratic and political machinery. For example, in 2008 Siemens paid the United States $800 million as a fine over bribing foreign officials in order to get lucrative contracts. In addition the company also paid $540 million to German authorities. In 2013, two members of the Bavarian parliament resigned over charges of corruption and nepotism. The Group of States against corruption has accused the country of not having tight laws to combat corruption (Mardas, Papachristou, & Varsakelis, 2014).

4.0 Economic system

4.1 Benefits

The economy of Germany is highly competitive. With a GDP of $3,076.4 billion, Germany is Europe’s largest economy. In 2012, the economy of the country continued to grow at a rate of 0.7% despite the 0.6% contraction in the continent. Germany is also the second largest exporter and importer in the world. Additionally, the labour market in the country is also quite flexible. The labour market in the country has proven to be resilient to the crisis. The current case in the country is in high contrast to the situation in the 1990s when Germany had an unemployment rate of 10%. The Hartz reforms have been key in reducing the rate of unemployment (Germany Country Profile, 2013).

4.2 Risks

The banking sector of the country is currently exposed to the Eurozone debt. Because of the exposure in the banking sector of the country especially from Italy and Spain in 2012, Moody changed its outlook from stable to negative. The main reason for the change is limited capacity of the banks to absorb debt and plummeting asset quality. The banks in the country have tried to put in place measures to reduce exposure in countries that have been hard hit by the crisis. However, they are still very vulnerable to bank failure in such countries. In addition to exposure, the banks in Germany are at the risk of making very low profits due to low rates of interest (Germany Country Profile, 2013).

4.3 Costs

Foreign trade in Germany is quite slow in recent years. From the beginning of 2013, the country has been facing considerable declines in exports as a result of the financial crisis in the region. The main challenge is because in 2012, the Eurozone accounted for 56% of the exports of Germany. The GDP growth in Germany is also sluggish. This would be a source of concern for a company that wants to invest in the country. Since 2012, the economic growth in Germany has been declining. According to Engel et al (2015), private consumption is the main source of economic growth. However, Germans are net savers and as such, domestic demand may not fuel economic growth.

5.0 Legal system

5.1 Benefits

The country has a comprehensive regulatory and legal structure at the regional, state and federal levels. The constitution of the country and compliance with international and EU law has cultivated a culture of protecting liberties and legal stability. The legal stability that comes from having more than 21,000 judges, 100,000 lawyers and 5,500 public prosecutors has attracted foreign companies to invest in Germany. In addition, Germany has formal openness to FDI. The laws of the company do not make distinctions between domestic and foreign investors(Bachmann, Baumgarten, & Stiebale, 2014).

5.2 Risks

Germany risks having an overregulated service sector. According to Homburg, Vollmayr, & Hahn (2014), the country is currently, ranked 8thamong 34 OECD countries regarding strictness in the service provision of professionals such as lawyers, engineers, accountants and architects. Additionally, the country’s licensing and permit process is quite cumbersome in comparison to other countries in the OECD. The OECD has specifically warned that overregulation may hinder productivity.

5.3 Costs

The taxation wedge in the country is considerably high. The tax wedge represents the taxation burden on citizens and corporations. Therefore, when endeavouring to invest in Germany, countries should realize that they are moving into one of the highly taxed countries in the region (Germany Country Profile, 2013).

6.0 Recommendations

6.1 Any company that seeks to invest in Europe should consider Germany because it is not only the largest economy in the Eurozone but also the most stable in the midst of the region’s financial crisis.

6.2 When choosing to invest in Germany, companies should consider adding the number of foreign expatriates sporadically because of the right-wing extremism that has resulted in discrimination.

6.3 Companies need to be aware of the taxation burden and regulations especially if they seek to invest in service provision.

7.0 Conclusion

Germany is one of the most politically and economically stable countries in world. Through investment in research and development, the country has been able to weather the storm of the EU financial crisis. Any serious company seeking to invest in Germany will find prosperous political, economic and legal framework that has proven to nature the visions of thousands of investors in the country. However, investing in the country also requires a proper appreciation of the accompanying risks and costs. Both start-ups and established companies can invest in the country as evidenced in the growth and innovation of small and medium sized enterprises.

References

Bachmann, R, Baumgarten, D, & Stiebale, J 2014, 'Foreign direct investment, heterogeneous workers and employment security: Evidence from Germany', Canadian Journal Of Economics, 47, 3, pp. 720-757, Business Source Complete, EBSCOhost, viewed 18 February 2015.

Engel, K, Dirlea, V, Dyer, S, & Graff, J 2015, 'How to build the permanently innovative company: five tested sets of management practices', Strategy & Leadership, 43, 1, pp. 3-10, Business Source Complete, EBSCOhost, viewed 18 February 2015.

Homburg, C, Vollmayr, J, & Hahn, A 2014, 'Firm Value Creation Through Major Channel Expansions: Evidence from an Event Study in the United States, Germany, and China', Journal Of Marketing, 78, 3, pp. 38-61, Business Source Complete, EBSCOhost, viewed 18 February 2015.

'Germany Country Profile' 2013, Germany Country Profile, pp. 1-85, Hospitality & Tourism Complete, EBSCOhost, viewed 18 February 2015.

Mardas, D, Papachristou, G, & Varsakelis, N 2014, 'Public Procurement and Foreign Direct Investment Across France, Germany, Italy and the UK', Atlantic Economic Journal, 36, 2, pp. 183-193, Business Source Complete, EBSCOhost, viewed 18 February 2015.

Linski, M, Matthews, B, Sidhu, S, Wirth, M, & Meraz, J 2011, 'Doing Business in GERMANY', Feature Edition, 2011, 3, pp. 76-101, Business Source Complete, EBSCOhost, viewed 18 February 2015.

Onaran, Ö, Stockhammer, E, & Zwickl, K 2013, 'FDI and domestic investment in Germany: crowding in or out?', International Review Of Applied Economics, 27, 4, pp. 429-448, Business Source Complete, EBSCOhost, viewed 18 February 2015.